What is Systematic Withdrawal Plan in Mutual Fund? How SWP Works

Systematic Withdrawal Plan or SWP in mutual fund is a way to redeem mutual fund units in systematic way, usually on monthly basis. This helps us to cover the monthly expenses using the mutual fund units accumulated over a period of time. Based on the 4% rule of SWP, you should redeem only 4% of the amount throughout the year in order to keep your portfolio growing in future.

Table of Contents

What is Systematic Withdrawal Plan in Mutual Fund?
How Systematic Withdrawal Plan (SWP) in Mutual Fund works?
Systematic Withdrawal Plan Benefits
Is SWP a good idea?
Is SWP better than FD?
Which SWP is best for 5 Years?
What is 4% rule for SWP?
SWP for Monthly Income Video
Conclusion

Let us understand Systematic Withdrawal Plan in mutual fund in more detail.

What is Systematic Withdrawal Plan in Mutual Fund?

Below are some key points about Systematic Withdrawal Plan in mutual fund:

SWP stands for Systematic Withdrawal Plan, which can be easily done in mutual fund
After you have saved or invested enough corpus in good mutual fund, based on SIP investment or lump sum investment, you can start SWP from that mutual fund
SWP allows you to redeem specific amount or number of mutual fund units every month
This redemption of mutual fund units every month can help you to cover your monthly expenses
SWP can be an alternative to other low interest options like Post Office Monthly Income Scheme of Senior Citizen Saving Scheme
Note that SCSS or Senior Citizen Saving Scheme helps you to get quarterly interest based on the amount deposited in post office
SWP can be a good way to cover for expenses during your retirement phase. It can also cover your travel trips you were planning for since long time.

How Systematic Withdrawal Plan (SWP) in Mutual Fund works?

The working of SWP or Systematic Withdrawal Plan is very simple:

You accumulate the corpus either using SIP investment in mutual fund, or using lumpsum investment
With time, this investment will help you to grow at the rate of 10% to 15% based on the good mutual fund you have selected
The idea is to withdraw only 4% of you total amount in the year to cover for your yearly or monthly expenses. So monthly withdrawal will be around 0.33% of your investment
So if your accumulated corpus if Rs. 1 crore in a mutual fund, providing you around 10% returns on average every year, if you redeem 0.33% every month, below is the calculation

SWP monthly Withdrawal Amount = 0.33% * Investment Amount / 100
SWP monthly Withdrawal Amount = 0.33% * Rs. 1,00,00,000 / 100
SWP monthly Withdrawal Amount = Rs. 33,333

Yearly Withdrawal = Monthly Withdrawal * 12
Yearly Withdrawal = Rs. 4 Lakh

So you get Rs. 33,333 every month based on the calculation above. So yearly withdrawals will be Rs. 4 Lakh
Note that your portfolio (investment amount) will increase at 10% rate, hence after 1 year below will be your investment value

Investment Value after One year = (Rs. 1 Crore * 10% / 100) - Rs. 4 Lakh withdrawal
Investment Value after One year = Rs. 1.1 crore - Rs. 4 Lakh withdrawal
Investment Value after One year = Rs. 1,06,00,000

So as seen above, Rs. 6 lakh will be additional returns you get based on the returns calculated and subtracting the withdrawal amount.

So if Rs. 33,333 or less is the monthly expenses for you, you can easily cover yourself with Rs. 1 crore investment in a mutual fund, provided you get 10% returns on average every year. If your expenses are high, you need to increase the investment amount to more than Rs. 1 crore accordingly.

ALSO READ: SWP for Monthly Income From Mutual Fund

Systematic Withdrawal Plan Benefits

Below are some of the benefits of Systematic Withdrawal Plan:

Monthly Expenses: SWP or Systematic Withdrawal Plan in mutual fund helps you to cover the monthly expenses based on the investment amount and the monthly withdrawals you decide based on expected expenses
Retirement: SWP allows you to plan for your retirement. Youngsters are more interested in FIRE (Financial Independence Retire Early), that is the process which allow youngsters to retire before time so that they can enjoy their passion
Travel: The monthly withdrawal using SWP allows you to travel to other cities and countries based on the total investment amount you have accumulated so far
Financial Independence: When enough corpus is saved / invested in mutual fund, you get a way via SWP (Systematic Withdrawal Plan) to not depend on your daily job. So you can simply withdraw from mutual fund, similar to monthly salary without actualy going for work on daily basis.

It is important to note that you should always have some hobbies and passion to work on something by yourself if you are quitting your job and get dependent on Systematic Withdrawal Plan in mutual fund to cover monthly expenses, in order to not make your life boring and loneliness.

You can use below Systematic Withdrawal Plan (SWP) Calculator to know how much investment amount will be enough for you to get monthly income from mutual fund

Is SWP a good idea?

Yes, SWP or Systematic Withdrawal Plan is one of the best ideas to cover for your monthly expenses, with or without working on your daily jobs, provided you have accumulated enough amount in a good mutual fund, that can give you at least 10% of average rate of returns every year.

In order to make use of SIP, you have to work for 10 to 5 years at the start of your career and build enough investment amount (portfolio) in mutual funds and debt instruments, so that the returns from these mutual funds help you to grow your wealth and fund for your daily expenses.

Is SWP better than FD?

SWP and FD are two different schemes that must be used for different financial goals.

SWP is used to cover for monthly expenses by following 4% withdrawal rule, where as FD or Fixed Deposits can be used to achieve any short term financial goal.

So FDs can be used to buy a new smartphone after 6 months, in which case, you already have the money to buy the smartphone, but waiting for latest features in the phone. In this case, simply by opening a Fixed Deposit, you’ll earn interest for the tenure you keep the amount for.

But if you are looking for retirement or passive source of income to cover your expenses, than SWP is better over long term.

ALSO READ: FD vs Mutual Funds Which is Better?

Which SWP is best for 5 Years?

SWP or Systematic Withdrawal Plan is just a way to withdraw month from mutual funds. You need to check which mutual fund is best for you to start SIP and than, once enough amount is accumulated, you can start SWP to withdraw systematically from that mutual fund.

Some of the best mutual funds for beginners are index funds such as mentioned below:

HDFC Index Fund Sensex Plan
Motilal Oswal Nifty Midcap 150 Index Fund
Motilal Oswal Nifty Small cap 250 Index Fund

Above funds cover most of the top 500 stocks in share market, hence will be good idea to start SIP and continue for next 10-15 years, based on your risk taking capability.

What is 4% rule for SWP?

4% rule for SWP simply means you should only withdraw 4% of your investment value from mutual fund in a financial year.

This will help you to withdraw only 0.33% on monthly basis – which helps in growing your money and also beat inflation if rate of returns from a good mutual fund in around 10% on average.

For example, if Rs. 1 crore is the amount you have accumulated, you can withdraw 4 Lakh in a year to cover for expenses. If this amount is less for your yearly expenses, increase the investment value to Rs. 1.5 crore to withdraw 4% (Rs. 6 Lakh) every year.

And in this way, you need to check for your yearly expenses which should be 4% or less of your total investment value, in order to beat inflation and grow your investment amount in mutual fund.

Watch below video on how SWP can be calculated for monthly income explained above.

SWP for Monthly Income Video

Watch more Videos on YouTube Channel

Conclusion

So SWP or Systematic Withdrawal Plan in Mutual Fund helps you to cover your expenses. The best way is to use 4% withdrawal rule in SWP so that your investment amount also keeps on increasing with time and you are able to beat inflation.

SWP can help you to retire early and follow your passion, while the mutual fund help you to cover your expenses and can be a replacement for your monthly salary. For short term goals, you should be using other saving schemes such as Fixed deposits, recurring deposits, etc. that will help you earn interest as well.

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